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Market Perspectives October 2020

02 October 2020

Welcome to the October edition of “Market Perspectives”, the monthly investment strategy update from Barclays Private Bank, which is also available to download as a PDF [PDF, 501KB].

As COVID-19 infection numbers continue to rise, especially in Europe, and the US presidential election nears, financial market volatility is climbing. Given the significant uncertainties lying ahead, volatility may have further to climb.

Elevated asset valuations are a recurring topic in investors’ discussions and contribute to markets’ nervousness. As next month’s US vote gets closer, volatility may climb. President Donald Trump appears to be hinting at more of the same if he is elected. Meanwhile, healthcare reform, higher tax rates and climate change initiatives may be on the cards if former Vice President Joe Biden wins. The Democrats appear to lead in the polls. But the outcome looks too close to call, leaving aside the risk of a contested election, a recipe that markets generally dislike.

While equity valuations might be elevated from an absolute point of view, the asset class remains attractive on a relative basis. But with potential flashpoints such as nagging pandemic developments, the US election and intensifying Brexit trade negotiations, equities are likely to remain volatile in the next few months. However, staying invested, while focusing on diversification and active management to help try to improve the risk/reward trade off, still appeals.

In bond markets, the US Federal Reserve and coronavirus developments are likely to remain the primary drivers, rather than November’s presidential vote if history is a guide. While the central bank’s revised inflation-targeting approach may encourage higher inflation ultimately, short-term rates could remain low for some time.

Another market feeling the heat from the pandemic is oil. Reopening economies and positive supply cut developments have largely been a tailwind for the commodity since July. While the oil price has likely passed its initial fast pace of recovery, the commodity is likely to be range-bound in the near term as supply cuts continue to partially counter weaker demand.

Away from the oil market, companies are increasingly transitioning towards a low-carbon world. Carbon footprinting has emerged as a useful tool to help show the potential transition risks potentially lurking in portfolios. We look at how the tool can help investors to find an investment strategy that can prepare for these challenges and potentially improve returns.

Jean-Damien Marie and Andre Portelli
Co-Heads of Investment, Private Bank

US election tensions

Next month’s US election campaign is heating up. The pandemic, recession and recent protests are likely to help shape the race for the White House. With only weeks to go a result too close to call, more financial market volatility seems a given.

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Uncertainty abounds

With COVID-19 infection numbers climbing and a presidential election nearing, volatility is unlikely to fade and risks remain. Find out why staying invested in equities still seems the preferable option, while focusing on diversification and active management to try and improve the risk/reward trade off.

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Election results rarely impact bonds

Central bank policy seems to be a prime driver for bond markets, not least with the US Federal Reserve tweaking its inflation-targeting process. November’s US election appears unlikely to affect bonds much, if history is a guide. Instead, the shape of the recovery and COVID-19 news is likely to have the greatest impact on yields.

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Oil: a slippery slope

Where next for the oil price? The commodity has profited from reopening economies, positive sentiment and better supply cut news since June. Beware. Risks of another round of COVID-19 infections and longer recovery period than many investors had expected may take the sails out of this momentum.

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How green is your portfolio?

Governments and industry are preparing for a move to a low-carbon economy. As such, understanding the potential physical impacts and transition risks of such a switch may matter for prospective portfolio returns. How can carbon footprinting be used by investors to implement a portfolio strategy that can prepare for these challenges?

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The dangers of extrapolation

Beware the dangers of extrapolating past performance. However, many investors seem to try and make sense of the world by building a compelling narrative around historical data. What are the potential pitfalls of positioning portfolios using this approach? More to the point, what other approaches might investors’ take?

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Multi-asset portfolio allocation

Sub-trend growth and low interest rates appear likely as COVID-19 infection numbers climb. In fixed income, developed market government bonds appeal. Dovish policy should underpin developed market equities and gold, though volatility may rise in the short term. However, we remain cautious on high yield bond prospects.

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Other editions of Market Perspectives

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